We have had a wild week on Wall Street, to put it mildly. We saw Twitter (TWTR) pop to something like 40x sales with a gain of more than 70% on the first day of trading. GDP growth came in well above the always highly accurate economist and analyst estimates, and the payroll number was much better than anyone expected.
Of course, good is the new bad because any sign of economic growth starts another round of taper talk. The market is addicted to cheap money inflating asset values and any discussion of tapering bond-buying creates immediate selling. Listening to the media chatter could easily leave one convinced that the market is a casino populated by raving lunatics.
In search of some sanity, I ran a screen looking for what I like to call common-sense stocks. The screen looks for companies that have been able to annually grow dividends and book value by at least 7%, on average, for the last decade. That's about twice the growth and inflation rates I would expect from a normalized economy over a long period. Once I have a list of companies, I filter them by making sure the price-to-earnings ratio multiplied by the price-to-book-value ratio is less than 22.5, as suggested by Ben Graham. The list of stocks fitting the criteria is small, but some stocks make sense for those willing to buy and hold for a long time.
The largest company on the list is Wells Fargo (WFC). It is one of the best-run big banks and its brokerage operations have grown to be third largest in the U.S. It's a favorite of many value types and Warren Buffett imitators, and it should provide decent returns for those willing to hold for a long time. The bank has grown book value by 12% annually, on average, for the past decade, and dividends have risen by 11% a year, on average. That's impressive given the damage we have seen in many of its other large bank competitors. I prefer to buy big stocks like Wells Fargo during a market collapse but long-term holders should see strong dividend growth appreciation from even this level. The PE is just 10 and the price-to-book ratio is only 1.7, so the product is well below our threshold.
There are only 40 names on the list and many of them are banks. The only other qualifying large bank is Capital One (COF), which makes the grade with book value growth of 13% and dividend growth of about 18% annually over the past decade. The product of the PE ratio and price-to-book-value ratio is just 14, so it makes the cut on valuation by a wide margin. More than a dozen smaller banks on the list reinforce my belief that this is the single-best sector for new money.
Energy and oil-services stocks are also well represented on the list. Apache (APA), Murphy Oil (MUR), Helmerich & Payne (HP) and Valero (VLO) have shown decent book value and dividend growth, and they are still reasonably valued. Energy has been cheap all year, but long-term holders of these stocks will benefit from the eventual global economic recovery and growing energy demand.
One of my favorite stocks still makes the grade even after its shares moved up sharply in recent months. I believe that Corning (GLW) is eventually going to turn into a leading growth stock as demand for its glass products rises faster than the economy. It has exposure not just to smartphones and tablet computing, but also to life sciences, environmental and industrial marketers. That should grow faster than the broad economy over the next decade. The product of the PE and price-to-book ratios is 20, so it still comes in a little under the valuation threshold.
The stocks on the list will not be immune to a broader market declines and, in all honestly, they are better purchased in a selloff. But if you take a very long view of the world and need to get money to work today, then a list of common-sense stocks with strong book value and dividend growth can provide some measure of shelter from the day-to-day noise and insanity that is Wall Street.